R.O.W. With Butch — Either Tax Tech Giants In Europe Correctly, Or STFU

How do you do? My name’s Mike Butcher. I’ve been writing for TechCrunch since 190… I mean 2007, based out of London, England, although I seem to find myself on a plane a lot. Generally I visit and cover tech startups and venture capital in European countries (West and East), but I’ve also covered tech in many other parts of the world. This week I’m beginning a new weekly Sunday column which we’ve decided to call ‘Rest Of World With Butch’ or ‘R.O.W. With Butch’ for short. As you may have picked up, we’re going for a terribly droll double-meaning here. The column will generally cover tech issues outside of North America (specifically, outside Silicon Valley), and often about that strange land called Europe, but I’ll also sometimes have a genuine row about an issue with something, or someone. There may also be times when I’ll be giving you an outsider’s perspective on a Silicon Valley issue – in other words, I’ll tell those guys how they look to the… rest of the world! All clear? Ok… let’s go.

Headlines like this are an annual event in Europe as companies file their taxes at the end of the financial year.

The reasons are very simple.

For convenience and to create a working market in Europe’s fragmented continent, the Europe Union – with the open-eyed sanction of its member states – has constructed a way for companies to be legally HQ’d in one country in Europe (and taxed there) but trade all over Europe, thus creating a notional ‘single market’. There’s only one problem – this encourages companies to locate their legal HQ in a country with a low tax regime, while trading in all the rest. Not only that – it also allows companies to transfer assets and income between subsidiaries. Heavens to murgatroyd! It’s just like Capitalism!

But the latest example of how all this operates hit the news this week when it emerged that Amazon had paid just £4.2m in tax last year, despite selling goods worth £4.3bn. This is more that the combined UK sales of Argos, Dixons or Marks & Spencer Food, all ‘Main Street’ retailers in the UK. The previous year it paid £3.2m in tax. What tax it does pay in the UK is on it’s UK subsidiary. Amazon.co.uk reported profits of £17m in 2013, and effectively paid 24% of that in corporation tax, the legal going rate.

Predictably, politicians weighed in on the headlines, as they yawningly do every year without doing much about it. They said we (we!) should shop elsewhere. No doubt politicians in other parts of Europe, where Amazon trades, are doing the same thing.

This strategy can have some effect. Starbucks resumed more ‘normal’ UK tax payments last year, after a little outrage from the great British public. But then, you can often choose which coffee shop to walk into when you’re out on the street. Online, the convenience of buying in one click from Amazon, rather than punching in credit card numbers into some other online store, is a temptation just too much to bear for many. In the last ten years Amazon has paid just over £10m in taxes. But in the last four years it’s generated £23bn in British sales.

And of course, the principle is very simple, and well-known to the tax accountants serving the likes of Amazon, Google and many other US tech giants.

Simply take online payments via a subsidiary based in a low tax jurisdiction – in Amazon’s and many other cases it is the tiny state of Luxembourg – but locate all your warehousing, engineering, accounting, human resources and other functions in a country where you can easily hire and fire, attract talent and conduct an efficient business.

Given that hiring and firing in Europe is perhaps the easiest in the UK or Ireland, that’s where many companies locate the bulk of their operations.

Meanwhile, two desks in Luxembourg gather dust while a couple of accountants sip their morning espresso, or order some crémants while tucking into their ‘Judd mat Gaardebounen’ (a smoked neck of pork and broad bean casserole with a thick creamy sauce, if you must know). Mostly likely, Luxembourgians are also jostling for elbow room in the restaurant, as their country is only slightly larger than the tiny Indian Ocean island of Mauritius, while chit-chatting with all the other accountants in the place (for who, pray tell, would do anything else in Luxembourg than be a worker for a U.S. tech giant? Nice work if you can get it, although Amazon does say it has “hundreds of employees” in Luxembourg. (This is clearly bad news for any pigs in the vicinity who’d like to hang onto their necks).

Thus when a European who can’t be faffed to do a simple Google search for another store or physically leave their house wants to buy from Amazon, their bank statement will show a payment to “Amazon EU S.à.r.l.”, not Amazon.co.uk or whatever other URL Amazon operates in each European country.

“Amazon EU S.à.r.l.” (try saying that quickly!) is merely the a master company in Luxembourg, while all other EU operations are subsidiaries, one of the largest being in the UK.

Of course, it serves the Politicians and the tabloid press well that make constant references to tax against revenue; where you don’t pay tax on revenue, but on profits.

Admittedly the UK government has been pressing the EU on this whole tax loophole for some time.

Because last anyone checked, a small bookshop or retailer in Europe has to pay taxes. Even massive retailers like John Lewis – like Macy’s in the U.S. – have to pay tax. Amazon and Google barely do, but that they do pay, they pay entirely legally.

Then again, Amazon’s UK business employs 7,000 staff, with many more seasonal workers joining its warehouses at Christmas. And that’s just them. Google, Twitter, Facebook and all the others employ skilled, educated workers in Europe. That means Europe is encouraged to produce those people from its education systems. These are the jobs of today, and the future, are they not?

An Amazon spokesperson has defended the company noting that it “pays all applicable taxes in every jurisdiction that it operates.” Amazon EU ships to all 28 countries in the EU from multiple websites in a number of languages.

But poor old Amazon isn’t the only one getting it in the Judds.

Twitter doesn’t make anywhere near as much money in the UK as Amazon, but it’s using a similar tax strategy, HQ-ing itself in low tax Ireland.

Twitter put 100 people in its European HQ in Dublin. Engineers? Some. But mostly sales, legal, human resources and finance.

Meanwhile in London it’s contracted architects to spend £1.5m to fit out 25,000 sqft of offices in Euston, London. That’ll be for way more than 100 workers.

Twitter will be joined in the building by fellow US social media giant Facebook, which agreed to take 90,000 sqft of the building in September last year. Twitter will take the ninth floor, while Facebook will take floors three floors in the building.

And they’ll have neighbours!

Google is planning a £300m headquarters up the road in nearby King’s Cross.

How cosy!

Will the hundreds of employees there be filing in tax forms? Well… we do know most will be hammering the phones and going on long lunches in Soho with London’s huge ad agency community.

See, all these tech giants (and MANY other international companies, not just tech ones) operating over here all employ a common corporate tax method called transfer pricing. This takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there. This more or less avoids the country’s 12.5 percent income tax. The so-called ‘Double Irish’ relies on shuffling the money between two Irish companies.

Google Ireland Limited employs almost 2,000 people in Dublin and is credited by Google with the bulk of its non-U.S. Ad sales. The Dublin subsidiary has its “effective centre of management” in Bermuda, according to company filings.

Irish tax law exempts certain royalties to companies in other EU- member nations, thus, payments from Google’s Dublin company don’t go directly to Bermuda, but make a detour via the Google Netherlands Holdings B.V. Tax lawyers call this method the “The Dutch Sandwich.” Cute, huh?

For its part Facebook sends its earnings from Ireland to the Cayman Islands, according to the company’s filings in Ireland and the Caymans.

I could go on but I won’t.

All this is well known to governments, politicians and the companies concerned.

Everybody knows.

Everybody.

The simple point here, is that none of these tech giants are doing anything illegal.

Remember, a company’s obligation to its shareholders is to legally try to minimize its taxes and all costs.

They are just doing what companies do. It may not sound fair. It may not sound very fabulous, given the spending strain on governments in the global recession. But this is literally the away the cookie crumbles. And the companies did not bake the cookie, the governments did.

So if UK politicians want to hit up Amazon or Google or Twitter or anyone else for more tax, they shouldn’t bleat about the methods companies legally use to pay as little tax as possible.

And it’s not even just tech companies doing this. These are just the companies politicians can easily finger, because they provide products (mostly FREE products) almost all of us use every day.

No, greed is not good. No, none of this feels right, or within the spirit of the tax laws.

But if European politicians and law makers want to do something, they should instead invade Luxembourg or Dublin or Amsterdam with a battalion of paper shredders. Or just shut the fuck up. Because this same debate happens every damn year.

Politicians saying something is not fair is like alcoholic parents chastising a teenager for getting drunk at a party.

Instead of dealing with the tax issue, they put the onus on us as consumers to sort the issue out.

So it’s all OUR fault for using the wrong websites? M’kay….

Meanwhile, back in Euro-land, Jean-Claude Juncker – a politician you probably haven’t heard of, is a longtime Euro politician campaigning to become the next president of the European Commission.

He is currently campaigning on the admittedly laudable platform of encouraging Europe to create a “single digital market” and re-energise its technology industry. No bad thing.